Abrupt Shift in Monetary Policy on Oct. 6

When Paul Volcker was sworn in as chairman of the Federal Reserve Board on Aug. 6, there were widespread expectations of shifts in U.S. monetary policy. Volcker, formerly president of the New York Federal Reserve Bank, was known for his conservative views on managing the nation's money supply. He had consistently voted with the minority favoring higher interest rates and tighter money at meetings of the Federal Open Market Committee in the months preceding his appointment. Volcker's appointment was considered a signal to the financial community, both here and abroad, that the Carter administration was ready to fight inflation with the full force of monetary policy.

Two months later, to the day. Volcker began to fulfill those expectations. On the night of Oct. 6, a Saturday, the Federal Reserve (“the Fed”) announced it would raise the rate of interest it charged on loans to member banks by a full percentage point and was prepared to allow interest rates to fluctuate more widely than any time in recent history in order to focus more accurately on bank reserves and thus the growth of the money supply.

The business community responded enthusiastically to the “Saturday Night Special,” as the new policy came to be known. The dollar stopped its downward descent on most international exchanges, and the price of gold stopped climbing. But closer to home, the Fed's actions threw stock, bond and commodity markets into turmoil and quickly led to record lending rates which threatened to close off much of the nation's housing market. If the long-expected recession had not come yet, a group of economists told Time magazine, it was surely on its way now. Economist Otto Eckstein predicted unemployment would reach 8 percent by the second half of 1980, up from 5.8 percent in October. “The Federal Reserve is taking a tremendous gamble with the economy,” Eckstein said. He said it was too early to tell if the Fed would “succeed in licking inflation without creating another recession as deep as 1974.”